Carney: 'Forward guidance is not DOA'

The Bank of England governor defended his forward guidance policy to MPs today. Which should reassure businesses.

Bank of England governor Mark Carney was forced to defend his flagship forward guidance to a committee of MPs this morning.

In a meeting of the Treasury select committee, one MP suggested that the guidance, which is designed to help people plan ahead by pegging the interest rate against unemployment, was ‘dead on arrival’ because unemployment is dropping faster than expected. By all accounts, though, Carney kept his cool, calling the accusation a ‘total failure of logic’, and adding that the 7% unemployment rate is a ‘threshold, not a trigger’.

‘The exact timing of when that 7% threshold will be achieved is subject to uncertainty,’ he said.

‘What the guidance is doing is giving businesses, households, financial market participants, parliamentarians perspective on the conditions that are necessary to exist in the economy before [the Bank] would consider adjusting monetary policy, tightening monetary policy – in shorthand, adjusting interest rates.’

Which will come as a relief to businesses, many of whom have expressed concern that if interest rates rise too soon, it will scupper the recovery, which they reckon is still too fragile to withstand something as drastic as an interest rate rise.

Carney also said that George Osborne had questioned whether the Bank needed more powers to limit risk-taking in banks. The Bank’s new Financial Policy Committee, which regulates banks, doesn’t have the power to control their leverage ratios – how much capital they hold in relation to their assets. According to Carney, the chancellor has written to him asking him to review whether the FPC should have that power.

He told the committee that in Canada, where the central bank does have it, it’s been helpful.

‘If I could pick one element that was essential to the performance of the Canadian banking system during the crisis, it was the presence of a leverage ratio.’

Of course, the idea of any more rules – particularly governing how much capital they hold – will cause much kicking and screaming among bankers over here.

They already have various EU rules to comply with, as well as some set by the UK government. They’d argue that’s enough – although given the length and depth of the last crisis, others will point out that banks need reining in. MT hopes you’re sitting comfortably. It’s a debate that will go on for a long time…